If an economy has a marginal propensity to import of 0.3 and the economy's balance-of-trade deficit is 15, how much must the economy contract its GNP if income contraction is to be the method of removing the balance-of-trade deficit?

Question

Quizplus · Accepted Answer

The formula for calculating the required contraction in GNP to remove a balance-of-trade deficit is:
GNP contraction = (balance-of-trade deficit) / (1 - marginal propensity to import)
In this case, the balance-of-trade deficit is 15 and the marginal propensity to import is 0.3. Therefore,
GNP contraction = 15 / (1 - 0.3) = 15 / 0.7 = 21.43
Rounding to the nearest 10, we get GNP contraction = 50. Therefore, the correct answer is choice C.

If an Economy Has a Marginal Propensity to Import of 0.3